Consumer spending rebounded in February and month-on-month inflation readings cooled somewhat from the spike seen in January. However, inflation adjusted gains in disposable personal income stalled for a second month as savings dropped and interest payments on debt rose. We remain pessimistic about the sustainability of consumer spending and expect a pull back over the summer. From the Federal Reserve’s perspective, these data are not compatible with interest rate cuts in the near-term. We continue to forecast that an initial 25 basis point cut will come in June.

Highlights

Collectively, these data show mixed progress for the economy. Real personal consumption expenditures (PCE), which include spending on both goods and services (unlike the retail sales report which is goods-focused) rebounded in February. However, real disposable personal income growth was roughly flat for a second month. Additionally, consumer savings dropped to 3.6% - the lowest reading since late 2022 and well below the 7.4% average seen in 2019. Finally, non-mortgage interest payments remain near record highs due to elevated interest rates and outsized debt levels. We continue to expect that US consumers will have to pull back on spending later this year as they rebalance their priorities on spending, savings, and debt.

On inflation, the February PCE deflators were mostly in-line with expectations. On a month-on-month basis, the headline reading was 0.3% (vs. 0.4% in January) and the core reading was 0.3% (vs. 0.5% in January). While these readings are cooler than the spike recorded in January they remain hotter than the rates seen late last year. In year-on-year terms the headline reading rose 0.1 percentage point to 2.5% year-on-year due to base effects and rounding, while the core reading fell 0.1 percentage points to 2.8%. These readings will not be enough to trigger the Federal Reserve to cut rates in the near-term.

Spending Details

Personal consumption expenditures rose by 0.8% m/m (in nominal terms) in February, vs. 0.2% m/m percent in January. Spending on services rose by 0.9% m/m while spending on goods rose 0.6% m/m. After accounting for inflation, real consumer spending was up 0.4% m/m in February with spending on services rising 0.6% m/m and spending of goods rising 0.1% m/m. Jan-Feb real spending was 1.8% annualized above Q4 2023 following a 3.3% annualized gain at the end of last year.

Inflation Details

Headline PCE price rose to 2.5% y/y in February from 2.4% y/y in January, but core PCE price inflation (which excludes food and energy) slowed to 2.8% y/y from 2.9% y/y. On a month-over-month basis, headline PCE inflation slowed to 0.3% from 0.4% and core PCE inflation slowed to 0.3% from 0.5%. Prices for goods rose 0.5% m/m and services rose 0.3% m/m. Food prices rose 0.1% m/m and energy prices rose 2.3% m/m. Within services, shelter costs continue to slow from a year ago which will be important for inflation to return to the Fed’s 2% target.

Income Details

Overall personal income rose by 0.3% m/m (in nominal terms) in February, vs. 1.0% m/m in January. When factoring in inflation, the real month-over-month growth rate was -0.1% m/m. In year-over-year terms, real personal income rose 2.1% in February from 2.4% in January. Meanwhile, real disposable personal income (which is personal income less taxes) fell by 0.1% m/m, vs. 0.0% m/m in January. Finally, the personal savings rate fell to 3.6% from 4.1% of disposable personal income.

Interest Payment Details

Nominal personal interest payments (PIP), which represent nonmortgage interest paid by households, rose by 0.8% m/m in February, vs. 0.8% m/m in January. In year-over-year terms these payments are up 25% (vs. a peak of 66.5% y/y in June 2023). Consumer’s growing reliance on debt, and specifically credit card debt, and the surge in interest rates over the last two years are responsible for these gains. As of February, PIP accounted for 2.5% of overall Disposable Personal Income down from a peak of 2.8% in Sep 2023. Rates this high have not been seen since 2008.